Oil hits $70 as tensions deepen fear of disruption
London, UK – Oil on Monday extended its dramatic surge, surpassing US$70 a barrel in London for the first time since September, as Middle East tensions flared after the US assassinated one of Iran’s most powerful generals.
Oil futures jumped by another 1.4 per cent on Monday as the US State Department warned of a ‘heightened risk’ of missile attacks near military bases and energy facilities in Saudi Arabia. US President Donald Trump reiterated threats of retaliation should Iran ‘ do anything’ and vowed heavy sanctions against Iraq if American troops are forced to leave OPEC’s second-biggest producer.
The clash is fanning fears that a wider conflict could disrupt supply from the region, which provides almost a third of the world’s oil. Prices haven’t hit these levels since an attack on Saudi Arabia’s production facilities in September - which the US blamed on Iran - briefly halted about 5 per cent of global output.
“Crude has some more risk pricing to do,” said Bob McNally, president of Rapidan Energy Group in Bethesda, Maryland, and former White House oil official under president George W Bush. “We are going to grind through the US$70s up towards US$80 Brent as Iran calibrates and executes its retaliation.”
Brent futures rose as much as US$2.14, or 3.1 per cent, to US$70.74 on ICE Futures Europe and were at US$69.55 at 10:32am in London. The contract surged 3.6 per cent on Friday. West Texas Intermediate advanced 1.2 per cent to US$63.78 on the New York Mercantile Exchange.
The political tension is buffeting a market that had already been tightening, in large part because of production cuts by the OPEC cartel and its allies. The premium for immediate Brent futures compared with those seven months ahead more than doubled in the fourth quarter.
Saudi Arabia, Iran and Iraq together pumped more than 16mn barrels of oil a day last month. Most of their exports leave the Arabian Gulf through the Strait of Hormuz, a narrow waterway that Iran has repeatedly threatened to shut down if there’s a war.
The US said there’s a risk of attacks particularly in the eastern province of Saudi Arabia and near the Yemeni border, close to military bases as well as oil and gas facilities, the State Department said in a tweet. The President is also sending more troops to the Middle East.
Rising tensions between the US and Iran have already caused considerable turbulence in oil markets, but so far it’s been short-lived. Last year, Washington blamed Tehran for sabotage attacks on supertankers and a missile and drone attack on Saudi Arabia’s Abqaiq crude-processing plant in September - the largest single supply halt in the industry’s history. Iran denied involvement.
Beyond crude’s rise, there were other signals in the market that people were preparing for further disruption. Volatility has risen to its highest level in a month and the cost of derivatives that insure against price spikes increased. Four million barrels of options contracts that would profit from a jump in Brent crude to US$95 a barrel traded for both March and September. The cost of insuring tankers could rise again, after it surged in the wake of the Abqaiq attack in September.
Still, after climbing 23 per cent last year oil prices may have already reached levels that don’t leave much scope for further gains. Goldman Sachs Group Inc said an actual disruption to global supplies is needed to keep prices at current levels.
“The oil market always assumes the worst, so a lot of the general risk is already priced in,” said Jaafar Altaie, managing director of Abu Dhabi-based consultant Manaar Group. “Prices at US$70 a barrel already assume the worst-case scenario and we see them holding there.”